Mixing up finance: Smooth or lumpy results?

Blended finance and its ability to accelerate delivery of energy access objectives, under the Sustainable Development Goals, has been the subject of several strong reports over the past few months, including from OECD, the Blended Finance Task Force, CPI and, most recently, SunFunder, released at the Sustainable Energy for All Forum in Lisbon, Portugal. These reports present a wide discussion of the characteristics of blended finance, the role of different “colors of money” in the mixtures, and examples of different blended architecture. All are well worth the read.

As a co-founder and former CEO of E+Co, one of the pioneer blended capital intermediaries for energy access, a lot of this discussion is not particularly new. Mixing grants, program-related investments and concessional debt from development finance institutions (DFI) and private investors with earned revenues, to both reduce investor risk and offer affordable finance to energy enterprises, was something E+Co was doing in the late 1990s and early 2000s. But while blended finance is not a new concept, it has gained currency in development circles and there have been innovations in the structures and business models for delivering it. These appear to be well suited to unlocking capital in far bigger scale, particularly for universal energy access goals under SDG7.

The Blended Finance Taskforce’s working definition of blended finance is “the use of public/philanthropic funds to mobilize multiples of additional private capital.” However, case studies of implementation show this can be an interesting mix – in SunFunder’s case, private capital opening doors for public capital. Before DFIs invested, SunFunder built out its track record of investing, primarily in off-grid solar companies in Africa, on private capital. The SunFunder report outlines how initial investments from high net worth individuals and impact investors in their funds launched the first tier of what is now over $62 million of capital unlocked for energy access in developing countries. As part of this trajectory, Facebook provided SunFunder with its first significant investment grant as junior capital to catalyze other more mainstream investors.

The story line here is that private capital de-risked the DFI funds that followed, which seems contradictory to the theory that public money is key for de-risking private capital flows. The OECD report provides us with a broader platform to interpret this early private funding. Its definition is that blended finance is the strategic use of both public and private monies that have a specific development mandate for mobilizing additional capital towards sustainable development.

While the SunFunder experience is a direct example of OECD’s definition, it’s a challenge to the more traditional understanding of the role of using public money to de-risk private investment. Given the level of overall investment needed to achieve universal energy access goals by 2030 (estimated at $52 billion per year[1]) public funding has to be utilized as efficiently and effectively as possible to leverage private investment. Using public money to de-risk private investments, rather than the other way around, would be a start.

The SunFunder report also left me with a curious mixed message on the relationship between DFIs and private sector intermediaries. DFIs have recognized SunFunder as a viable intermediary and placed significant capital with it. However, at other times DFIs have squeezed this intermediary out of credit-worthy transactions by offering highly concessional rates directly to the same off-grid solar companies that SunFunder is working with. These have sometimes been at rates similar to what they offered intermediaries, despite the significant risk protections that intermediaries can provide, such as diversified portfolios and “blended” capital structures. This kind of incoherence in the use of public money is certainly not a pathway for scaling energy access. As the SunFunder report concludes, this will “hinder the sector moving to further maturity, and prolong the need for concessional capital in financial intermediaries.”

DFIs can’t have their cake and eat it, too. The mixing-up of sources of finance here is lumpier. If the goal is to dramatically increase private finance in the maturing decentralized energy access market, then they can’t cherry pick the good deals. They need to look at where risks are higher and innovate ways that will stimulate and de-risk the next generation of SunFunders and other intermediaries. In doing so, they can smooth out how blended capital scales in time to meet 2030 goals.